Weighing The Week Ahead: What Do The Mid-term Elections Mean For Financial Markets?

We have a huge economic calendar. While employment data will get most of the attention, there are also important reports on ISM manufacturing, personal income, PCE prices, consumer confidence and auto sales. Earnings season continues with another big week of reports. In normal times these topics would provide plenty to think about. Nowadays, none of this seems important. If the stock decline continues at the start of the week, that will take center stage. We’ll probably get another “crisis” prime-time feature from CNBC, bumping Shark Tank or Jay Leno.

If things calm down a bit, expect to see the punditry turn attention to the US mid-term elections, asking: How will the mid-term elections affect financial markets?

As always, WTWA does not advocate particular candidates. As citizens, we should all do what we think is correct. As investors, we should be politically agnostic. That does not mean blind and deaf. Elections have an impact on the markets overall as well as individual stocks. That should be our focus.

Last Week Recap

In my last edition of WTWA I suggested to expect a week of wondering what could go wrong, mostly fueled by misperceptions. That is exactly what happened, with daily discussions of the “message” of the market, telling us something we otherwise would not see. There may well be more of the same, but this week will have even more competition for attention.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring the futures chart from Investing.com. The image posted here shows a static view. If you go to the site, you can check out the news at various points during the week and adjust the view in many other ways. Since futures trade when the stock market is closed, you can also see that trading.

The market declined 3.9% and the weekly trading range was 4.8%. Both were extremely high. The VIX implied volatility measure remained higher than the actual results. I summarize actual and implied volatility each week in our Indicator Snapshot section below.

Noteworthy

There is a fascinating update of the four-year old “trolley problem.” The original question asked whether you should switch a speeding, runaway trolley from one track (with five people in the path) to another (with only one potential victim). The new study, with the inclusion of self-driving cars, raises questions of great interest without obvious answers. Those interested might also consider the variations from different cultures. For example, which countries give emphasis to the elderly?

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

New Deal Democrat’s high frequency indicators are an important part of our regular research. This week reflects some softening in all three time frames reported, although the nowcast remains a “weak positive.” NDD concludes, “An economic slowdown looks baked in the cake, with the issue of whether it leads to outright recession in a year or so still outstanding”.

When relevant, I include expectations (E) and the prior reading (P).

The Good

Earnings season showed continuing strength. FactSet reports as follows (with more facts and figures in the full report):

Companies are outperforming recent averages on the earnings side and performing in line with recent averages on the revenue side. In terms of earnings, the percentage of companies reporting actual EPS above estimates (77%) is above the five-year average.

Here is the record by sector.

Durable goods increased in September by 0.8%. E -1.8% P 4.6%. Subtracting transportation, the report was a small miss. (Steven Hansen, GEI) takes a deep look, with interesting measures and comparisons.

Pending home sales increased 0.5% in September, beating expectations for a decline of 0.2%. P -1.9%. (Calculated Risk)

Q3 GDP registered growth of 3.5% in the first estimate. This was a decline from 4.2% in Q2, but a solid number that beat expectations. Looking a bit more deeply, some analysts had less enthusiasm. Economy “deniers” jumped on the increase in inventories as a sign of hidden weakness in the report. I have often commented that inventories are one of the most spinnable statistics. Bob Dieli had his usual “no spin” take:

He also notes that the tariff effects are just beginning to show up.

The Bad

New home sales disappointed at a SAAR of 553K. E 625K P 585K revised down from 629K. Calculated Risk concludes, “It is not time to panic – or start looking for a recession – but this was a very weak report.”

Initial jobless claims up-ticked to 215K. E 211K P 210K. Like many other data points, this is a very good level, but a little weaker than recent reports. Jill Mislinski provides analysis as well as this chart:

Michigan sentiment sagged a little to 98.6. E and P both 99.0. Jill Mislinski has the full story along with the great charts we have come to expect. She also quotes survey chief economist Richard Curtin:

Importantly, stock price declines, rising inflation and interest rates, and the negative mid-term election campaigns, have not acted to undermine consumer confidence. Needless to say, consumers are not immune to these negative factors. The data only indicate that the tipping point toward escalating pessimism has not been reached. This resilience was primarily due to the prevailing belief that the economy would produce robust job growth during the year ahead, even if overall wage growth remained dismal.

The Ugly

Bombs. More shooting of innocents, even while worshipping. I am deeply saddened by the violence, and by the circumstances and reactions. What does it say about our ability to debate and decide, essential to democratic processes?

The Calendar

The calendar is among the biggest we see with a focus on employment. I am also watching the important reports on PCE prices (the favorite Fed inflation measure), personal income and spending, consumer confidence, and auto sales – especially Ford F150’s. The ISM manufacturing index is one of the best of the reads on current conditions. There will be plenty of earnings news.